5 of the Worst Things You Can Do With Your Money

By Lisa Scherzer | The Exchange – Wed, Apr 17, 2013 2:47 PM EDT

Financial blunders are made all the time and everywhere – at the grocery store, at the bank, in the housing market, in the stock market, with your children’s allowance. Some stem from a lack of knowledge or awareness, while others are the result of human behavior that often works against our own best interests. The worst mistakes you can make, though, usually involve those that seem harmless but end up impacting your overall wealth.

We spoke with financial advisers about the worst financial slip-ups people make and how much they can cost you. No doubt the opportunities to mishandle your money are endless, and this list is by no means exhaustive. But here are some money moves you should strive to steer clear of.
1. Spending an unexpected windfall. All of it.
Two-thirds of baby boomer households will likely receive some inheritance, with a median amount of $64,000, for a total prospective inherited amount of $8.4 trillion, according to research published in 2011 by the Center for Retirement Research at Boston College. A big challenge for many inheritors, though, is that they can be completely inexperienced with money. And with inexperience and poor – or no – planning, comes the potential for squandering a windfall.
Americans spend their inheritance shockingly fast, says Mackey McNeill, a CPA in Bellevue, Ky. “When people get a big amount of money that they didn’t earn, they feel like it’s so much money, they’ll never run out,” she says.
McNeill recounted the story of a client whose mother had died and left her about $500,000. “By the time she walked in my door, she only had half of it left," McNeill says. "She paid off some of her mortgage, bought a new car, donated some money and bought a big-screen TV for her son” while having the unrealistic expectation of being able to quit working and pay for her son’s college tuition. “You need to run the numbers before spending it," adds McNeill. "If they keep that capital and invest it, they can generate income for the rest of their lives."
2. Cashing out of your 401(k) when you leave your job
Among workers who left their jobs in 2012, 43% took a cash distribution, up slightly from 42% in 2010, according to yet-to-be-released data from Aon Hewitt, a human resources consultancy. And the smaller the balance in the plan, the more likely it is that participants will cash out when they leave. But taking money out of your plan before retirement is going to cost you; you’ll get hit with a 10% early-withdrawal penalty (if you’re younger than 59 ½) and get taxed on the sum. And possibly more serious, you lose the earnings that money could have generated.
Consider this example from Aon Hewitt of an employee who cashes out of three employer-sponsored 401(k)s over 30 years of working and retires at 65. Assume she saved 8% of her pay, got a 5% match per year, earned 3% annual salary increases on a starting salary of $50,000, and earned 7% in investment returns a year. After factoring in taxes, penalties and lost interest, she’d accumulate $189,000 in her account by age 65. If she didn’t touch the money at all, however, she’d have $872,000 – the cash-outs would have cost this saver almost 80% of her nest egg.
Upon leaving, many advisers have traditionally recommended rolling a 401(k) into an IRA, in part because IRAs offer a wider range of investment options than a typical employer’s 401(k). More recently, some employers are offering a stronger selection of investment options in their 401(k) plans, says Avani Ramnani, CFP and director of financial planning and investment management at Francis Financial in New York, but the decision to roll funds into another 401(k) or an IRA also depends on how savvy of an investor you are. If you’re comfortable selecting investment options and know how to allocate funds, the IRA offers a great opportunity. But if you’re less experienced, selecting some low cost index-based options from an employer’s plan may make more sense, Ramnani says.
3. Stopping contributions to your 401(k) plan when the market – or your account – drops
These plans are the main investment vehicle that will fund the bulk of many Americans’ retirements. There’s a reason your 401(k) automatically takes money out of your check each time you get paid – if it were up to you to set aside 5% of your pay, you’d never do it. Employee participation in 401(k) plans increased dramatically after the passage of the Pension Protection Act of 2006, which made it easier for companies to auto-enroll their employees, according to a paper published by the Center for Retirement Research at Boston College last year.
The only real reason you would shut down your contributions is if you’ve got enough retirement savings already. “I still have people telling me they’ll stop contributing to their 401(k) because it’s going down," says Steve Burnett, CFP and financial adviser at Hanson McClain, a firm in Sacramento. "And the investments might be fine. You have to understand stock prices aren’t static; what you’re hoping for is over time, is that you acquire a mass of savings to live off.”
And you’ve heard it before – you’re giving up free money when you don’t contribute to your 401(k): the matching contribution from your company (if they offer it). Say you earn $60,000 a year and your company matches 50% of your contributions up to 6% of salary. Stop participating and you’re giving up $1,500 bonus (if you contributed 5% of your salary) or $3,000 (if you contributed 10% of your salary).
4. Succumbing to lifestyle inflation
A 10% salary bump shouldn’t always equate to a 10% increase in your shoe budget or upgrading to the pricier health club. Of course, a splurge is fine, but try to resist the temptation to adjust your lifestyle upwards – or succumb to what some pros call lifestyle inflation.
Taking a $2,000 vacation is a one-time expense. Moving into an apartment that costs $150 more per month is a new and “permanent” expense that becomes part of your lifestyle cost. If we’re not careful about raising the bar on lifestyle costs, we’re likely to ramp it up so high that eventually we’ll be unable to manage the occasional speed bumps that come our way, says Michael Kitces, a CFP and director of research at Pinnacle Advisory Group in Columbia, Md. “We also end up with a lifestyle that requires an extraordinary pile of money to afford in retirement,” he says.
5. Using home equity to invest in the stock market
If you’re a good way through paying down your home mortgage, and with rates so low (last week Freddie Mac said the average 30-year fixed rate fell to 3.43% from 3.54%), doesn’t it make sense to take some equity out of your house and sink it into the market? “I’m getting people who ask about this, saying ‘my home price is pretty stagnant – shouldn’t I take money out of my home and invest it?’” says Burnett.
The problem with this approach is that the stock market is at multi-year highs at the moment – exactly the wrong time to enter the market, as most pros will tell you. Homeowners should pay down the remaining mortgage so that, when they leave the workforce, they’re not burdened by it. “If you pay X amount on your mortgage for a certain number of months, you’ll get a certain outcome. If you invest in the market, it’s uncertain you’d make money,” says Burnett. “Most of our clients are retired, and the ones doing well are those who paid down their house and were debt free.”

Source(http://finance.yahoo.com/blogs/the-exchange/5-worst-things-money-184739197.html)

Payroll Tax Takes a New Bite

By Serena Ng | The Wall Street Journal – Mon, Jan 14, 2013 10:38 AM EST

• 
  Erik Szylard Daenitz for The Wall Street Journal - Kari and Jonathan Barker shop with their sons Kaleb and Mason at Costco Wholesale in Bountiful, Utah. 'I used to be a diapers snob,' says Kari Barker.

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Symbol	Price	Change
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American workers are opening their first paychecks of the year and finding an unpleasant surprise: The government's take has gone up.
A temporary cut in Social Security withholdings gave Americans hundreds of extra dollars to spend over the past two years. But Congress allowed that break to expire during the wrangling over the fiscal cliff, meaning that Social Security taxes have reverted to 6.2% of salary from the temporary 4.2%.
The noticeable lightening of paychecks as consumers remain tentative threatens to put a drag on economic growth. The effect for companies is that the hit is likely to cement a frugal attitude that led consumers to cut back on eating out and shift to less-expensive store brands.
Kari Barker, an accountant in Salt Lake City, recently received her first 2013 paycheck and realized that she and her husband will take home $250 less every month. The 32-year-old, who works as a financial controller for a medical-devices company, accepted a second job last weekdoing accounting work for a friend's startup company.
Ms. Barker recently had a second child, who joined the first in day care. She has been planning meals more carefully to spend less on groceries and has switched to less-expensive brands of household and baby items. "I used to be a diapers snob and would only buy Pampers or Huggies," Ms. Barker said. "Now I buy Target's house brand, because it's two-thirds the cost."
Procter & Gamble Co. (PG), which owns Charmin, Pampers and other brands, declined to comment, citing the company's scheduled earnings report this month. Huggies maker Kimberly-Clark Corp. (KMB) also declined to comment.

The Barkers at their Farmington, Utah, home. (Erik Szylard Daenitz/WSJ)Roberton Williams, a tax economist and the Sol Price Fellow at the Tax Policy Center in Washington, said the expiration of the payroll-tax cut will leave the average American household with $18 to $20 less to spend each week, or $900 to $1,000 a year.

For the country's consumers as a whole, Mr. Williams said, that is a decline of $120 billion from last year. The total comes to about 0.8% of U.S. gross domestic product and is nearly equivalent to the most recent full-year sales at P&G, J.C. Penney Co. (JCP) and McDonald's Corp. (MCD) combined.
The payroll break wouldn't have affected Social Security's solvency, at least on paper, because Congress had promised to make up the lost revenue. But many liberal lawmakers had worried that the break could have added to the program's long-term problems.
The impact on the economy now is hard to quantify, because it isn't clear how much of the money in consumers' paychecks was spent and how much of it was saved. Still, "it's a significant amount of money that's being pulled out of people's pockets and not being replaced," Mr. Williams said.
The tax hit could affect companies such as consumer-goods makers, clothing retailers, department stores, food producers, grocery stores and restaurants. Some companies said it is too soon to estimate the potential impact of the tax break expiration on their sales and profits, but it nevertheless has been a nagging concern.
Foot Locker Inc. (FL) Chief Executive Ken Hicks said in November that the payroll tax increase was "of particular concern," even though the shoe retailer has had 11 consecutive quarters of sales and profit growth.
"Anything that takes money out of the pockets of our customers creates a more challenging business environment," he told analysts during the company's earnings conference call.
Executives at Sanderson Farms Inc. (SAFM), the country's third-largest chicken producer, said the payroll-tax change and any other activity in Washington that could damp consumer spending might reduce chicken prices, which were on the upswing recently.
"When people tighten their wallets and cut back on eating out, it hurts our industry," said Mike Cockrell, chief financial officer of the Laurel, Miss. He pointed to the experience in August 2011, when political wrangling over the debt ceiling took a bite out of consumer confidence and led to a drop in sales for many restaurants and other companies.
The payroll tax's impact is likely to be uneven. Sales of big-ticket items like cars, flat-screen television sets and computers may not be hit. But consumers are expected to trim spending on everyday products and clothing.
Edward Riggle, a 61-year-old in Virginia Beach, Va., said he noticed a nearly $40 increase in the amount of Social Security tax withheld on his recent pay stub. Mr. Riggle, a Vietnam War veteran who retired from the Navy in 1991 and now works at a military call center, calculated that he will pay $1,036 more in Social Security tax this year, a large unexpected decrease in his take-home pay.
In response, Mr. Riggle said he changed the withholding amounts for his federal and state taxes to make sure no excess cash is kept from his paychecks and is looking to save money on regular purchases.
On a recent shopping trip, Mr. Riggle and his wife decided not to buy their usual Charmin toilet paper and Purina One dog food, choosing less-expensive versions instead.
Nestlé SA (NESN.VX), which owns Purina, didn't respond to a request for comment.
Sung Won Sohn, an economist and vice chairman of budget-fashion chain Forever 21 Inc., said companies that make or sell lower-priced items may not see much of a hit as shoppers get more stingy. "It could benefit us as people trade down," he said.
Some consumers won't cut corners on essentials, though the higher taxes will mean less money for extras like eating out. Karen Fuller, a 35-year-old mechanical engineer and mother of two children in Bellingham, Wash., said she never worked the additional cash from the tax break into her family's budget, because she knew it was temporary.
"We didn't need the extra money, so we spent it going out to eat, on shopping and baby stuff," Ms. Fuller said. "I didn't want to be dependent on anything that might have to go away if the money went away."
—John D. McKinnon contributed to this article.


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Source(http://finance.yahoo.com/news/payroll-tax-takes-bite-041300823.html)

Why nearly half of us don't pay income tax

It's a provocative fact about the tax code: Nearly half of U.S. households end up owing no federal income tax.
But it's not surprising given the addiction to tax breaks by both Democrats and Republicans, and the fact that the U.S. tax code is set up to be progressive.
"There's nothing nefarious going on here," William Gale, co-director of the independent Tax Policy Center, said on a call with reporters Wednesday.
Intentionally or not, Congress set it up this way.
Over the years, lawmakers have increased the number of non-payers by enacting reams of tax breaks -- such as tax credits for work, kids and education. And the Bush tax cuts, first passed more than a decade ago, expanded many of them.
Then lawmakers approved temporary tax breaks after the 2008 financial crisis to stimulate the economy, and that expanded the rolls even more, said Robert Greenstein, president of the liberal Center on Budget and Policy Priorities.
The Tax Policy Center estimates that for tax year 2011, 46% of households will end up owing nothing in federal income taxes.
The percentage was closer to 40% before the recession, Greenstein said.
Looking ahead if the Bush tax cuts are allowed to expire next year, the percentage of non-payers could drop to 36%, said Roberton Williams, a senior fellow at the Tax Policy Center.
Millionaires who owe no federal income tax
While the Zero Tax Club includes some very high-income households, it is made up disproportionately of low- and lower-middle-income households.
They, too, may benefit from a bevy of tax breaks, such as tax credits for work and kids. But for many, those types of breaks aren't the biggest reason why they end up in the non-payer group.
Say lawmakers stripped out all tax breaks except those most elemental to a progressive code -- such as the standard deduction and personal exemption, which exempt subsistence-level income and dependents. Even then, about 23% of households would still end up owing nothing in federal income taxes, according to Tax Policy Center research.
In other words, a couple with two kids, earning less than $26,400, would get an $11,600 standard deduction and four exemptions worth $3,700 each, reducing their taxable income to zero, Williams noted in the blog TaxVox.
But if payroll taxes are counted, the number of non-payer households drops precipitously -- to an estimated 18% in 2011.
That's because payroll taxes, which fund the big entitlement programs, hit low-income households harder than most since 100% of their income is subject to them. High-income filers pay a lower percentage of their income in payroll taxes since wages subject to the Social Security tax are capped at $110,100.
Most of those 18% of households that owe neither federal income nor payroll taxes are elderly or had income under $20,000, Williams said.
But even then, they still end up paying something in taxes. Once sales taxes as well as state and local income taxes are thrown into the mix, virtually no household in America would qualify for the non-payer group.
View this article on CNNMoney


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source(http://finance.yahoo.com/news/why-nearly-half-us-dont-094700143.html)

Deadline Looms: 7-Day Plan to Filing Your Taxes

By Kay Bell | Bankrate.com – Thu, Apr 5, 2012 3:11 AM EDT

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Remember when your mother scolded you for running up the stairs two steps at a time? "Slow down," she would say. "You're going to trip and hurt yourself." Taking it step by step will get you there almost as quickly with much less chance of a painful fall.

As usual, mom was right. And her wise words are just as applicable to your tax-filing tasks.

When the tax-filing deadline nears, folks tend to rush through returns. That's a bad idea, since you're more likely to make mistakes or overlook tax breaks, both of which could cost you some serious tax dollars.
But by approaching your tax filing one step at a time and spending around an hour a day on taxes for the next seven days, you can complete your annual taxes in just a week. Here's the Bankrate plan.

1. Gather data.
2. Examine exemptions, etc.
3. Decide on your deductions.
4. Find your forms.
5. Count your credits.
6. Fill out your forms.
7. Sign, seal and deliver.

Even better, by spreading out the duties you'll save your sanity, good humor and maybe a little tax money, too. So click to the next slide to get started with the first day's tasks.

[Related: Last-Minute Tax Tips]

Day 1: Gather data

Let's start with the name: the income tax. That means you need to gather all your earnings information.
Start with your W-2 wage statements. You should have one for each salaried job you had last year.
Don't forget any 1099 forms. These statements, each with a different suffix, will come from various sources.
You'll get some from employers if you did independent contract work. Others will come from banks and investment companies if you owned financial instruments that paid interest or dividends or you sold a stock or other property.
Are you a gambler? It's not a good idea to take chances with the Internal Revenue Service, so be sure to report any winnings because that money is taxable, too.
Retirees also take note. You might owe the IRS on part of your Social Security.
Even tough economic times are no insulation from the IRS. If you collected unemployment, those payments are taxable. You should have received a Form 1099-G showing the amount of unemployment upon which you'll owe taxes.

Find all these income statements, along with other tax-related documents you received earlier this year. Your tax tasks for the day are done.

Day 2: Examine exemptions

Today we start slashing your tax bill by claiming exemptions, dependents and a wide variety of adjustments to income. And this is all done on the first page of your Form 1040 or Form 1040A tax return.
First, your exemptions: On your 2011 return, you get to take $3,700 off the top for each person you claim as an exemption. That's generally a pretty easy determination: you, your spouse and any dependents, which generally means your kids. But did you care for a parent, even one who didn't live in your home? You may be able to claim an exemption for that person, too.
The key thing to remember when it comes to folks who qualify as your dependents is that you need their Social Security numbers. Without those nine digits, the IRS will disallow the claim.
Next, there are some expenses eligible taxpayers can claim directly on the 1040 or, to a lesser degree, the 1040A. These are known as adjustments to income or above-the-line deductions and include, to name just a few, certain IRA contributions, student loan interest, alimony payments or moving costs.

Take a few minutes to check out the complete income adjustments list, and note which ones apply to you. That's it. You're done for today.

Day 3: Decide on deductions

The real fun begins today with deductions. You can choose between the standard or itemized deduction amount.
Most taxpayers use the standard deduction rather than bothering with tracking every expense to itemize. If the standard amount works for you, great!
If, however, you have substantial tax-deductible costs, such as additional home-related write-offs, medical expenses and charitable donations, you'll want to maximize those expenses by itemizing.
The important thing when it comes to itemized deductions is to have the documentation to back up your full array of Schedule A itemized costs.
Go back to the material you collected on day one. Your W-2s will show how much state and local income taxes you paid. Find that statement from the mortgage company showing your loan interest and property tax payments. And dig out the receipts you got for all your deductible donations.

Make sure you don't miss any, because all these amounts will help whittle your income to the lowest possible taxable amount.

[Related: Tips to De-Stress Your Home]

Day 4: Find your form

Today we find the tax form that's right for you.
The IRS offers three: 1040EZ, 1040A and 1040. It may be tempting to use the simplest form, the 1040EZ, if you can, but look at the other two anyway. They offer many more tax break opportunities.
Once you've made your choice, check it out to see exactly where you'll put the information you gathered. (But don't enter anything yet. We have to have something to look forward to!) This also will give you an idea of any additional forms you may need. Where an attachment is required, it will be noted on the individual tax return you file.
For example, if you opted for the long 1040 return, you'll likely need Schedule A to itemize your deductions. You also might need Schedule B if you have a lot of interest or dividend income to report. Self-employed taxpayers will see mention of Schedule C or Schedule C-EZ, along with the accompanying Schedule SE to pay self-employment taxes.

Even if you use tax software to fill out your return, it's a good idea to know what will be expected. By examining the forms beforehand, you'll have a heads-up when it comes time to start filling them out.

Day 5: Count your credits

If you thought deductions were good, you're in for a real treat today.
Pull out the tax return you chose yesterday. If it's a Form 1040 or Form 1040A, look on the back and you'll find an assortment of credits sprinkled in all those lines. These tax credits, along with your withholding, are how you pay your eventual IRS bill.
That means tax credits cut your tax bill dollar for dollar. A few even can get you a refund.
If you didn't make much money, you may be eligible for the earned income tax credit, or EITC. This is the one credit that's also available on the 1040EZ.
On the other two forms, many more credits show up. Among the most popular are the child-related tax breaks, from the $1,000 per child tax credit to the one you can claim if you paid for day care to watch them while you worked. There's even a credit to cover some adoption expenses.
Credits also are available for some education costs, yours as well as your children's. Even older filers have their own special tax credit.

So check out the credit possibilities, and get ready to claim them. You'll get your chance tomorrow.

Day 6: Fill out your forms

Are you ready to have some tax fun? Today we get to work on your actual return.
If you use a software program, it will take you through the process, asking you for the information that you've collected over the last few days.
Nearly half of filers, however, still send in hand-filled paper returns. In this case, you can either work your way through income and deduction data stacks, entering the information at the appropriate tax return lines, or you can start at the beginning of your chosen 1040 and work your way down the return.
If you're filling it in by hand, here's a tip: Have the instruction book for your tax return handy. While Form 1040 and any other schedules you might need seem daunting, they don't contain all the information you need to take full advantage of possible tax breaks. That's found in the instructions, where you can determine just what tax form lines do -- or don't -- apply to your personal filing situation.
Today might take a bit more than an hour; but as your mom cautioned, you don't want to be in too big of a hurry. Enter your information carefully to ensure you don't make any common tax-filing mistakes.

When you finish, set it aside. We have one more day to wrap things up.

Day 7: Sign, seal and deliver

We're almost done! Today, with fresh eyes, double-check your tax form entries.
Once you're sure you've correctly accounted for all your income, claimed every possible deduction and credit, and entered all that information properly on your return, it's time to put the finishing touches on your annual tax duties.
Sign it, electronically or by hand, depending on your delivery method. Either way, a John Hancock is a requirement.
If you did your taxes on computer, be sure to save a copy to your hard drive. A printed copy isn't a bad idea, either. If you filled out your Form 1040 by hand, make yourself a copy of that final form and all attachments.
Then send it on its way, either via the post office (make sure you've put enough stamps on the envelope) or by hitting the "enter" button on your computer keyboard.
That didn't take long. So what are you plans for the rest of today's planned tax hour?

Bankrate suggests you take a well-deserved break! And mark your calendar for this time next year, when you can again complete your annual tax chores in just seven relatively stress-free days.

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Source(http://finance.yahoo.com/news/deadline-looms-7-day-plan-070114125.html)